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Edited version of private advice
Authorisation Number: 1052344494088
Date of advice: 17 December 2024
Ruling
Subject: Commissioner's discretion - aggregated turnover
In this ruling:
• 'Person B' includes any discretionary trust holding Company A shares, if Person B controls that trust
• 'Person C' includes any discretionary trust holding Company A shares, if Person C controls that trust
• all legislative references are to the Income Tax Assessment Act 1997.
Question 1
Will the Commissioner's discretion be exercised under subsection 328-125(6) to determine that Company A is not controlled by Person D, Trust E, or other entities under Person D's control from Date Z?
Answer
Yes.
Question 2
Does the aggregated turnover of Company A for the purposes of section 328-115 include the annual turnover of Person D and the entities Person D controls from Date Z?
Answer
No. However, Company A's aggregated turnover would include the annual turnover of Person D entities for the period from Date Y to Date Z.
This ruling applies for the following period:
1 July XXXX to 30 June YYYY
The scheme commenced on:
DDMMYYYY
Relevant facts and circumstances
Company A
1. Company A was registered in Australia on Date W.
2. redacted for privacy reasons
3. Company A was founded by two original members:
• Person B
• Person C.
4. Company A's shareholding has changed since registration. Person B (through a discretionary trust Person B controlled) and Person C were Company A's original shareholders, with 50% each. Over the years, Company A issued shares to two employees (Employee F and Employee G), and Trust E (which is a discretionary trust controlled by Person D). Table 1 below describes Company A's shareholding since registration.[1]
Company A issued shares to Person D's discretionary trust as a passive investor.
5. Company A sought passive investment from private investors.
6. When seeking passive investment, Company A's existing shareholders were introduced to Person D.
7. Before that time, Person D had no existing relationships with Person B or Company A and there were no common directors, partners, or shareholders for any other entities.
8. Person D and Person D's associated entities haven't had any obligation to purchase or sell any goods or services to or from Person B, Company A, or any other entities controlled by Person B.
9. There are no formal agreements in place which dictate how the parties (Person D and Person B and their controlled entities) are to act in relation to each other.
10. On Date W, Trust E was issued with 'A' Class shares (for market value on arm's length terms).
11. Following Date W, Trust E was issued with additional 'A' Class shares, meaning that on Date X held an amount less than 40% of Company C's total shares.
Person C left Company A to work elsewhere, and Person D agreed to buy and hold Person C's shares until Person B could buy them later.
12. Person C decided to leave Company A during the XXXX income year, as Person C no longer wished to be part of the Company A business. Person C joined an organisation focussed on developing products and services that compete directly with Company A. Company A's board and shareholders were concerned because they considered Person C's action in joining the competitor had the potential to disrupt Company A's market position.
13. Person D agreed to buy Person C's ordinary shares to hold them temporarily.
• At first, Person C was asked to sell his or her shares in Company A to Person B.
• This share sale was done to mitigate the perceived adverse risks created by Person C's departure.
• Person B considered this was urgent, holding concerns that Person C may have sold the shares to one of Company A's competitors.
• Person B initially thought he or she would require 3 months to raise the funds to acquire Person C's shares.
• However, Person B recognised that it was urgent to distance Person C from Company A to safeguard its intellectual property, business model, and staff.
• No suitable external investors could be found. Company A considered that no external investors would wish to acquire Person C's ordinary shares.
• The business relationship between Person C and the other shareholders had become untenable.
• Person B and Person D both understood that Person C's shareholding would jeopardise Company A's business.
• Person D agreed to purchase Person C's ordinary shares (through Trust E) instead and hold them temporarily until a suitable investor could be found.
• Person D only sought to protect his or her investment in Company A and wasn't involved in day-to-day operations or strategic operations.
• Person D (via Trust E) purchased the x less than 40% shareholding previously owned by Person C with the understanding that Person B would purchase them from Person D once Person B had obtained the necessary finance.
• Person B would have purchased Person C's shares directly (rather than indirectly from Trust E) if Person B had the necessary funds available.
14. On Date Y, Person D (via Trust E) and Person C executed the share transfer from Person C to Trust E.
15. Following Person C's sale to Trust E, Trust E temporarily held y% more than 50% of Company A's shares. They consisted of both 'A' Class shares, and ordinary shares.
16. Person D and Person B had made an agreement about what would happen after Trust E bought Person C's shares. The agreement was verbal and not documented. That agreement was to the following effect.
• Person B would buy the shares from Trust E within a short period, within the XXXX income year.
• Person B would pay the same price per share as Trust E paid to Person C.
• Company A would continue to operate the same way and wouldn't change how it would be managed during the intended short period of Trust E's additional ownership.
17. This plan was delayed by Covid-19 and related conditions. These unexpectedly halted Person B's efforts to raise capital to buy Person C's shares from Trust E. Person B was unable to raise the required funds to buy all the shares in either the XXXX or YYYY income years.
18. However, on Date Z, Person B secured funding to acquire some of Person C's shares, and acquired ordinary shares representing z% of the total shares on issue from Trust E. this brought Trust E/Person D's shareholding to between 40 and 50% of Company A's total shares
19. Person B and Person D intend that Trust E will transfer the remaining ordinary shares formerly held by Person C to Person B or other entities. They intend that Person B or an independent shareholder will acquire the remaining % of the ordinary shares from Trust E which were originally held by Person C over the next 12 to 24 months. This would return Trust E's ownership to its original x%. less than 40% Following this proposed transaction, Trust E will only hold the 'A' Class shares it has held since Date X. less than 40%
Person D's acts as a non-executive director and isn't involved in Company A's day-to-day operations.
20. Person D has been a director of Company A since registration.
21. Person B, Person C, and Employee F have been directors for most of the time since registration.
22. Person D acts in accordance with key financial, commercial, and business decisions made by Person B and the other directors.
23. Person D isn't involved in or responsible for the business's day-to-day operations or decision making.
24. At various times Company A's directors included Person B, Person C, Employee F, and Person D.
25. Currently Person B and Person D are the only directors.
26. Person D and Person D's controlled entities don't use or share any of Company A's business assets (i.e. Company A acts as an independent company). Company A's main business premises, employees, and bank accounts are only used and maintained by Company A for its day-to-day business activities, and not by other entities. Those assets aren't used or controlled by other entities. Trust E, Person D, and associated entities don't use Company A's assets in any of their business activities.
27. Person B exercises independent judgment when carrying out duties as a director.
28. Person D, while listed as a director, isn't involved in the day-to-day operations and isn't involved in the business decision making process of Company A. Person D's role is limited to a non-executive capacity in which Person D may bring an independent and objective view to Company A's performance and operations (based on Person D's experience as a shareholder and director of other businesses). Person D isn't part of the executive team.
29. Person D spends most of his or her time operating entities controlled by Person D's family. Person D works 5-6 days a week in another business and only attends Company A's board meetings once a month for approximately 2 hours, for a high-level overview of the business.
30. Person D and Person D's controlled entities operate in business areas that aren't related to Company A's business.
31. Neither Company A nor Person B (including Person B's affiliates or any entities connected with Person B) have at any stage owned, or had rights to acquire ownership of, interests with rights to income or capital distributions from, or voting rights over, entities controlled by Person D.
32. Table 2 in the private ruling listed Person D's controlled entities and their main business operations. It has been redacted for privacy reasons in this edited version.
Company A has two classes of shares with equal voting rights - the A Class shareholders can appoint 1 director and the ordinary shareholders can appoint 3 directors.
33. The rights attaching to Company A's shares are determined under Company A's Constitution and a Shareholders Agreement.
34. Shareholders holding more than 50% of the 'A' Class shares are able to appoint 1 director.
35. Shareholders 'cumulatively' holding more than 50% of the ordinary shares can appoint 3 directors.
36. The 'A' Class shares confer on their holders the right to notice of, to attend, and to vote, at Company A's general meetings in the same way as ordinary shareholders, with each share carrying one vote on a poll.
37. The 'A' Class shares rank equally for dividends with the holders of all ordinary shares, except where the directors agree otherwise in accordance with the Constitution and the relevant Shareholders Agreement.
38. The 'A' class shares rank equally with ordinary shares in distributions of surplus assets or profits.
39. We have summarised the relevant clauses from Company A's Constitution, Shareholders Agreement, and a Deed of Variation to that Shareholders Agreement in Tables 3, 4, and 5. Clauses in the Shareholders Agreement which were removed by the Deed of Variation are marked by strikethrough.
Table 1: Changes in Company A's shareholding since registration partly redacted for privacy reasons
Table 1: Changes in Company A's shareholding since registration
|
Date |
Shareholding |
Percentages of total shares (rounding to 2 decimal places) |
Percentages of ordinary shares (rounding to 2 decimal places) |
|
a |
Person B - x ordinary Person C - x ordinary |
Person B 50% Person C 50%
|
Same as total shares |
|
Date X |
Person B x ordinary Person C x ordinary Employee F x ordinary Employee G x ordinary Trust E (Person D) x 'A' Class |
Person B about 30% Person C about 30% Employee F x% Employee G 0x% Trust E (Person D) 30-40% |
Person B 40-50% Person C 40-50% Employee F x% Employee G x% Trust E (Person D) 0%
|
|
Date Y |
Person B x ordinary Person C - none Employee F x ordinary Employee G x ordinary Trust E (Person D) x 'A' Class and x ordinary |
Person B about 30% Person C 0% Employee F x% Employee G x% Trust E (Person D) 50% Total 100% |
Person B 40-50% Person C 0% Employee F x% Employee G x% Trust E (Person D) 40-50%
|
|
Date Z |
Person B x ordinary Person C - none Employee F x ordinary Employee G x ordinary Trust E (Person D) x 'A' Class and x ordinary |
Person B 50% Person C 0% Employee F x% Employee G x% Trust E (Person D) 40-50% |
Person B 70%80% Person C 0% Employee F x% Employee G x% Trust E (Person D) 20%
|
Table 2: Person D's controlled entities redacted for privacy reasons
Table 3: Constitution summary
Table 3: Constitution summary
|
Topic |
Detail |
|
Power to issue shares |
Directors have sole power to issue shares on conditions determined by the directors (subject to the Shareholders Agreement). |
|
Shares with special rights |
Directors may issue classes of shares as they think fit with deferred, deferred, or other special rights or restrictions (rights to dividends, votes, return of capital as the directors think fit). |
|
Terms of 'A' Class shares |
The 'A' Class shares confer voting rights just like ordinary shares. One share = one vote. The A Class shares rank for dividends equally with ordinary shares, except where the directors agree otherwise (in accordance with the Constitution and Shareholders Agreement). The A Class shares rank equally with ordinary shares for distributions of surplus assets or profits.
|
|
Power to vary class rights |
Unless the terms of issue state otherwise, the company can only vary the rights attaching to a class of shares if either: • 75% of the holders in that class consent to the variation in writing, or • a special resolution is passed at general meeting of the class of shares allowing the resolution to be made. (At least 2 holders of shares in that class holding 1/3 of the shares in that class must be present.) This clause is subject to the Shareholders Agreement.
|
|
Reducing share capital |
The shareholders may reduce the company's share capital by special resolution. This clause is subject to the Shareholders Agreement. |
|
Rights to vote (general meeting) |
All shareholders are entitled to vote at a general meeting except in respect of the following shares: • shares in a class of shares that don't carry voting rights • shares which have unpaid amounts. Each shareholder has one vote on a show of hands. One vote for each share on a poll. The chair or any shareholder with 10% of votes may request a poll. Chair doesn't have a casting vote. |
|
Removal of directors |
Shareholders may remove a director by ordinary resolution. Shareholders may appoint a replacement by ordinary resolution. |
|
Powers of directors |
The company is managed by its directors. Directors may exercise all company powers except those which are required to be exercised by the shareholders in general meeting. |
|
Voting (directors meeting) |
A question which arises at a directors meeting must be decided by a majority vote. The chairperson doesn't have a casting vote. If a vote is tied, the motion isn't passed. |
|
Declaring a dividend. |
Directors may declare a dividend. May discriminate between classes of shares. This clause is subject to the Shareholders Agreement. |
|
Inconsistency |
If there's an inconsistency between this Constitution and any applicable Shareholders Agreement, the Shareholders Agreement prevails to the extent of that inconsistency. |
Table 4: Summary of Shareholders Agreement
Table 4: Summary of Shareholders Agreement
|
Clause/topic |
Detail |
|
Parties |
Trustee for Trust E Company A Person B Person C Employee F Employee G (Person B, Person C, Employee F, and Employee G are the 'Ordinary Shareholders') |
|
The Board |
Shareholders are entitled to appoint the following number of directors. • Shareholders holding more than 50% of the 'A' Class shares: 1 director. • Shareholders cumulatively holding more than 50% of the Ordinary Shares: 3 directors. Shareholders continue to be entitled to appoint that number of directors as long as they hold such shareholdings. The shareholders may remove any director they appoint and replace the director (or fill a vacancy) with another nominee. Each party acknowledges that a director appointed by shareholders under the relevant clause is the nominee of such shareholders. A director appointed by shareholders under a relevant clause may represent the interests and act on the wishes of those shareholders, so long as they (as an honest and reasonable director) can form the view that they are acting in good faith and in the best interests of the company as a whole. A shareholder mustn't seek to remove a director appointed by other shareholders, and must vote against a resolution to remove a director appointed by other shareholders.
|
|
Information |
The company will provide promptly to each holder of 'A' Class Shares: • annual unaudited financial statements • quarterly unaudited financial statements • monthly operations and finance reports describing progress against milestones, budgets v actuals, etc. The company won't be required to comply with any information rights in respect of any Investor whom the company reasonably determines to be a competitor (or an officer/employee/director/holder of 10% of shares in a competitor). The Investor agrees to keep information confidential and won't use it for any reason other than to monitor its investment (or to provide information to professional advisers to allow it to do that) or to fulfil its obligations. 'A' Class shareholders may visit and inspect company properties, examine books of account/records, and discuss the company's affairs, finances, and accounts with its officers. |
|
Decisions requiring unanimous agreement of shareholders |
The Constitution can only be amended by unanimous agreement of the shareholders. |
|
Decisions requiring special majority |
The following matters require approval by a special majority resolution: • altering the monthly budget • additional expenditure greater than 10% of the most recently approved monthly budget • altering the A Class share rights
• applying for voluntary liquidation or winding-up. For a resolution to be passed by a special majority it must be passed by a majority of the directors, including the director appointed by the 'A' Class shareholder, so long as that the 'A' Class shareholding is 5% or more of the total shareholding in the company. |
|
Issues of new securities |
Board must give written notice to the 'A' Class shareholders if it resolves to issue new securities.
'A' Class shareholder has right of first refusal over new securities.
deleted by the amendment |
|
Restrictions on Trading Shares |
Broadly, any shareholder seeking to sell their shares must offer them first to existing shareholders in proportion to their existing shareholding. Shareholders may buy more than their proportion if other shareholders don't claim their full entitlement. Shares can be sold to outsiders if there's still an excess. |
|
Inconsistency with Constitution |
If there's any inconsistency between this agreement and the Constitution, then the shareholders agree to abide by the agreement and do everything required to change the Constitution to make it consistent with this agreement. |
Table 5: Summary of Deed of Variation of Shareholders Agreement
Table 5: Summary of Deed of Variation of Shareholders Agreement
|
Topic and clause |
Details |
|
Parties |
Company A Trustee for Trust E Person B Person C Employee F Employee G |
|
Continued operation of original Shareholders Agreement as amended |
The parties agree that the original Shareholders Agreement, as amended by this deed of variation, continues in full force and effect in accordance with its terms. |
|
Decisions requiring special majority resolution |
Clauses x and y of the original Shareholders Agreement are deleted. x required a special majority resolution to create new classes of shares with senior rights or rights on parity with the A Class shares; y required a special majority to approve any issue of securities For any potential offer to invest in the company (equity issue or convertible debt) or any offer involving a sale of all or substantially all of the company's assets, or initial public offering, the parties agree that: • the company will make the offer/proposal/documents available to the Investor • the board of directors will meet to consider the offer or proposal (board must agree by special majority in accordance with clause z) either to pursue it or reject it If pursued, the board must finalise the deal by majority. Trust E doesn't expect and won't solicit any terms that would require existing shareholders to be diluted or to disadvantage them. |
|
Anti-dilution matters |
The anti-dilution measures in the original Shareholders Agreement are of no effect (including the provisions about issuing new securities and issuing employee options). Clauses a and b of the original Shareholders Agreement are deleted. |
In these reasons:
• 'Person B' includes any discretionary trust holding Company A shares, if Person B controls that trust
• 'Person C' includes any discretionary trust holding Company A shares, if Person C controls that trust
• all legislative references are to the Income Tax Assessment Act 1997.
Relevant legislative provisions
Income Tax Assessment Act 1997 section 328-115
Income Tax Assessment Act 1997 section 328-125
Income Tax Assessment Act 1997 section 328-130
Reasons for decision
In these reasons:
• 'Person B' includes any discretionary trust holding Company A shares, if Person B controls that trust
• 'Person C' includes any discretionary trust holding Company A shares, if Person C controls that trust
• all legislative references are to the Income Tax Assessment Act 1997.
Question 1
Will the Commissioner's discretion be exercised under subsection 328-125(6) to determine that Company A is not controlled by Person D, Trust E, or other entities under Person D's control from Date Z?
Answer
Yes.
Summary
40. Subsection 328-125(2) says that an entity (the test entity) controls another entity (the target entity) if it has a 'control percentage' (rights to income, capital, or votes) of at least 40%.
41. However, the Commissioner may determine that a first entity doesn't control another entity where two conditions are met. These conditions, imposed by subsection 328-125(6), are that:
• the first entity has a control percentage of at least 40% but less than 50%, and
• the Commissioner thinks that the other entity is controlled by a third entity (or group of entities that don't include the first entity).
42. TD 2023/5[2] says that 'control' for the purposes of subsection 328-125(6) means the type of control typically associated with ownership of a business entity including rights to income and capital, powers to oversee management, amend constituent documents, issue new ownership interests, and the power to authorise changes in the company's business direction.
43. Person D (through Trust E) had a control percentage of around 46% from Date Z. Therefore, the first condition is met from that time.
44. From that time, for reasons we explain at paragraph 64 to 73, we think Person B's rights as a majority shareholder give Person B substantial control over Company A in many of the matters that TD 2023/5 thinks relevant to ownership.
45. Therefore, we think that Company A was controlled by a third entity (Person B) from Date Z, so the second condition is met.
46. Since both conditions are met, the Commissioner will determine that Person D (including Trust E and other entities under Person D's control) don't control Company A from that time.
Detailed explanation
Context to the Commissioner's discretion in subsection 328-125(6)
47. Aggregated turnover is broadly your annual turnover plus the annual turnover of entities connected with you or that are affiliates of yours at any time during the income year (section 328-115).
48. However, there's an exclusion in paragraph 328-115(3)(c) for affiliate and connected entity turnover for periods they aren't affiliated or connected.
49. Section 328-125 is about when entities are 'connected with you'.
• An entity (the first entity) is connected with another entity if either controls the other, or both entities are controlled by the same third entity.[3]
• For all entities other than discretionary trusts, one entity controls another if the first entity has ownership interests to at least 40% of income or capital distributions, or (for a company) voting rights.[4]
• The Commissioner may determine that the first entity doesn't control the other entity if the control percentage is at least 40% and less than 50%, where the Commissioner thinks that the entity is controlled by a third entity or entities.[5]
• An entity can indirectly control through interposed entities if it controls an interposed entity and the interposed entity in turn controls another entity.[6]
50. Section 328-130 is about when an entity is an 'affiliate of yours'. Subsection (1) says that an affiliate of yours is an individual or company which acts (or could be reasonably expected to act) in accordance with your directions or wishes (or act in concert with you) in relation to the affairs of the entity's business. Subsection (2) clarifies that an individual or company isn't your affiliate merely because of the nature of the business relationship you and the individual or company share.
The Commissioner's 'discretion' in subsection 328-125(6)
51. Subsection 328-125(6) allows the Commissioner to determine that an entity doesn't control another entity if two conditions are met.
• First, the first entity's control percentage is at least 40% but less than 50%.
• Second, the Commissioner thinks that the other entity is controlled by another entity or entities.
52. The relevant Explanatory Memorandum[7] explains the discretion this way:
• Where an entity's interest is at least 40% but less than 50%, the Commissioner may choose to ignore the interest of that entity if the Commissioner determines that a third entity actually controls the other entity.
• The Commissioner may think that another entity controls the entity based on fact or on a reasonable assumption or inference. Whether or not the third entity has a 40% interest 'may assist' in determining whether the third entity controls, but this isn't decisive.
• Example 2.10 (in the Explanatory Memorandum) illustrated. The taxpayer inherited a 42% interest. The other shareholder is the manager with 58% interest. The taxpayer has no dealings with the manager. The Explanatory Memorandum concluded that the taxpayer's turnover won't be aggregated if the Commissioner thinks that the software company is actually controlled by the other person with the 58% interest.
For the first condition: has the control percentage condition been met? Yes, but only from Date Z. Person D (through Trust E) had more than 40% but less than 50% of Company A's shares (and income rights) for that period.
53. The first condition requires that the first entity seeking the discretion has a 'control percentage' of at least 40% but less than 50%.
54. Subsection 328-125(2) says that an entity has a control percentage if it has rights to a percentage of the company's income, capital, or votes.
55. In Company A's case, we can't determine Trust E's percentage entitlement to income. Company A could choose to pay dividends on either class to the exclusion of the other class or pay dividends of different amounts on each class. Trust E holds all the 'A' Class shares but only some of the ordinary shares. It's possible Trust E could receive:
• all the income (if dividends are only declared on the A Class shares)
• a share of income equal to its percentage of ordinary shares (if dividends are only declared on the ordinary shares)
• something in between (if dividends are declared on both classes in different amounts).
56. However, Trust E's percentage of rights to capital and votes is its total shareholding across both classes as both classes carry equal rights to capital and votes.
57. Since Person D controls Trust E, we will treat Person D as the entity exercising any control through Trust E's shareholding.
58. It follows that Person D falls within the control percentage range from Date Z.
• Until Date Y, Trust E had less than 40% of Company A's total shares, so Person D had less than 40% of the capital and voting rights. (We can't determine any percentage of income rights.)
• From Date Y until Date Z, Trust E had more than 50% of Company A's total shares, meaning Person D had more than 50% of the capital and voting rights.
• However, from Date Z, Trust E more than 40% but less than 50% of Company A's total shares, meaning Person D had at least 40% but less than 50% of the capital voting rights.
59. Therefore, the first (control percentage) condition is met, but only from Date Z.
For the second condition, does the Commissioner think that another entity controls the target entity in the relevant sense?
60. The second condition requires that the Commissioner thinks another entity or entities controls the target entity.
TD 2023/5 says that 'control' for the purposes of the discretion means control over the matters typically associated with ownership.
61. The ATO gives guidance about whether the Commissioner thinks another entity controls a target entity for the purposes of subsection 328-128(6) in TD 2023/5.
62. We'll list the most relevant propositions in TD 2023/5.
• The Commissioner must positively conclude that the test entity is actually controlled by a third entity (or entities); it isn't enough to show that the first entity didn't control the test entity. [6]
• The Commissioner's conclusion on control in a given case will turn on its specific facts and circumstances. [10]
• 'Control' for the purposes of the Commissioner's discretion means control over those matters typically associated with ownership of a business entity. That means entitlement to income and capital, and rights to participate in decision making. [13]
• Relevant decision making is matters that affect the entity's constitution, funding, structure, and management. They would ordinarily include composition and oversight of the management team, amending constituent documents, deciding on capital and entity restructuring proposals, issuing new ownership interests, winding up, and authorising significant changes in the direction of the entity's business operations. [13]
• Responsibility for day-to-day management of the test entity's affairs doesn't of itself constitute control for the purposes of the Commissioner's discretion. It's necessary to distinguish control of the entity from powers to control the entity's business. Autonomy to make significant business decisions isn't enough.[11, 14, 15]
• The Commissioner isn't confined to identifying a third entity with control under the primary tests (eg 40%). However, the focus of 'control' is on the matters typically associated with ownership of a business entity. [20-21]
63. Example 3 in TD 2023/5 is about special majority conditions in a Shareholders' Agreement. A majority shareholder holds 56% of the shares in a company, with a passive investor holding 44%. However, the Shareholders' Agreement says certain listed matters need to be approved by a special resolution (of 75% of shareholder votes). Those listed matters include business funding, significant new transactions, and changes in the nature of the existing business. TD 2023/5 concludes that the Commissioner would need to consider whether the majority shareholder's rights have been substantially compromised by the need to secure the passive investor's agreement about the listed matters.
Applying the ATO guidance in TD 2023/5, we think that Person B controls Company A in the relevant sense.
64. Since Trust E has a control percentage of at least 40% but less than 50%, the Commissioner may determine that Person D doesn't control Company A if the Commissioner thinks that another entity or entities controls Company A.
65. Following TD 2023/5's emphasis on the types of control associated with ownership, we've considered shareholder rights under Company A's Constitution and Shareholders Agreement (as amended).
66. Under clause x of the Shareholders Agreement, Person B may appoint 3 directors if he or she has more than 50% of ordinary shares.
67. Person B has more than 50% of the ordinary shares from Date Z. This means that he or she 'cumulatively' has more than 50% of the ordinary shares and may appoint 3 directors.
68. Whilst Person B doesn't seem to have exercised that right, Person B has the legal power to appoint two more directors, securing majority control.
69. Person B appears to have some, but not all, of the indicators of control in paragraph 13 of TD 2023/5.
• Person B has full control over management oversight and strategic direction from the right to control the board (by appointing up to 3 directors).
• Person B holds more than 50% of the total shares. This gives Person B rights to more than 50% of votes and capital. It also gives Person B more than 50% of income if dividends are declared equally on all shares.
• We think it's unlikely Person B would receive less than 50% of income in this case. The board has the discretion to declare dividends on either class of share to the exclusion of the other, or to declare dividends in different amounts on each class. However, Person B has the power (through the right to appoint up to 3 directors) to control the board's dividend decisions. Person B could choose to ensure that he or she received at least 50% of income by preventing Class A shareholders from receiving preferential treatment.
• Person B would need Person D's agreement to change the Constitution or Shareholders Agreement or wind up the company.
• Person B also needs Person D's agreement to raise equity finance, but Person B appears to have the power to raise debt finance without Person D's agreement.
70. Balancing the relevant indicators, we're satisfied that Person B controls on the facts and circumstances we have been provided with in this private ruling. Person B has full control over management and strategic direction. Person B has rights to more than 50% of votes, and capital, and could ensure he or she gets more than 50% of the income. We recognise that the Shareholders Agreement places some restrictions on Person B's ability to change Company A's constituent documents and to raise equity finance. However, on the facts of this case, we're satisfied that the special resolution requirements in the Shareholders Agreement (as varied) don't have the effect of substantially compromising Person B's rights as a majority shareholder in the sense of Example 3 in TD 2023/5.
71. Our decision relies on the facts and circumstances provided by the applicant. It's possible that the Commissioner could have reached different conclusions or weighed the relevant indicators differently if additional facts and circumstances had been included within the private ruling scheme.
72. Our decision also depends on the assumptions we've made. It's possible that the Commissioner would reach different conclusions or weighed the indicators differently if before the end of the ruling period:
• Person B stops holding over 50% of Company A's total shares or over 50% of Company A's ordinary shares, or
• events happen that have the effect of varying rights or obligations under Company A's Constitution or Shareholders Agreement.
73. Therefore, the Commissioner thinks that Person B controlled Company A in the relevant sense.
Conclusion on Question 1: the Commissioner will exercise the discretion because both conditions are met: Person D falls within the relevant control percentage range, and we think that Person B controls Company A.
74. Since both conditions are met, the Commissioner will exercise the discretion in subsection 328-125(6). First, Person D (through Trust E) has a control percentage of at least 40% but less than 50%. Second, applying TD 2023/5, the Commissioner thinks that Person B controls Company A in the relevant sense. From Date Z (but not before), both the first and second conditions are met.
Question 2
Does the aggregated turnover of Company A for the purposes of section 328-115 include the annual turnover of Person D and the entities Person D controls from Date Z?
Answer
No. However, Company A's aggregated turnover would include the annual turnover of Person D's entities for the period from Date Y to Date Z.
Summary
75. Company A's aggregated turnover includes the annual turnover of Company A's affiliates and its connected entities.
76. Because of our decision on the Commissioner's discretion in Question 1, Person D and Person D's entities aren't connected with Company A from Date Z onwards.
77. Person D and Person D's entities aren't Company A's affiliates because there are no reasons why Person D or Person D's entities would act in accordance with Company A or Person B's directions, wishes, or in concert with them, in relation to (Person D entity) business affairs.
78. However, Person D and Person D's entities will be connected with Company A from Date Y until Date Z, because Person D (through Trust E) had a control percentage of at least 40% from that point.
79. It follows that Company A's aggregated turnover includes the annual turnovers of Person D's entities from Date Y to Date Z.
Explanation
80. We explained aggregated turnover at paragraph 47.
81. Under section 328-115, Company A's aggregated turnover would include Person D (or entities Person D controls) if they are connected entities or if Person D's entities are affiliates of Company A.
82. We'll address the 'affiliates' question first.
We see no evidence of affiliate relationships on these facts. There's no evidence that Person D's entities (taken as a collective controlled by Person D) act in accordance with another relevant entity's wishes or directions.
83. To repeat, section 328-130 requires that the potential affiliate (an individual or company) acts, or could reasonably be expected to act, in accordance with the first entity's directions or wishes or in concert with it, in relation to the affairs of the potential affiliate's business.
84. The relevant Explanatory Memorandum[8] listed some factors which may have a bearing on whether entities are 'acting in concert' for this purpose. Those factors included:
• family or close personal relationships
• financial relationships or dependencies
• relationships created through links such as common directors, partners, or shareholders
• the degree to which the entities consult with each other on business matters
• whether one of the entities is under a formal or informal obligation to purchase goods or services or conduct aspects of their business with the other entity.
85. We'll dismiss the possibility that Person D's entities could be affiliates of other entities relevant to these scheme facts.
• Person D is a passive investor with no relationship with Company A or its other directors outside Person D's duties as a director, and Person D spends most of his or her time and efforts in operating other businesses.
• We see no evidence that Person D or the entities he or she controls act in accordance with the directions or wishes or in concert with the other entities in this ruling (being Company A, Person B, Person C, Employee F, and Employee G) in relation to the businesses that Person D's entities carry on.
• We don't need to consider whether Person D's entities could be affiliates of anyone else, as those relationships would be irrelevant to Company A's aggregated turnover.
86. We can also reject the possibility that Company A is an affiliate of Person D's entities. Person D acts as an independent, non-executive director and isn't involved in Company A's business operations. We don't think Person D controls Company A. From Date Z, Person B is a majority ordinary shareholder and may appoint up to 3 board members. Person D's rights under the Shareholder Agreement don't give Person D enough power to dictate how Company A acts without Person B's agreement. Since Person B exercises independent judgment as a director, there's no reason to think that Company A acts or would reasonably be expected to act in accordance with Person D's directions or wishes. Since there aren't any business connections between Person D's entities and Company A, we don't think Company A acts in concert with Person D's entities in respect of Company A's business.
Company A and Person D's entities won't be connected entities from Date Z because the Commissioner has determined that Person D doesn't control Company A from that date.
87. We'll now test whether Company A has any connected entities.
88. To reiterate, two entities are connected if either (including their affiliates) controls the other, or both are controlled by the same third entity.
89. We haven't identified any relevant affiliate relationships involving Company A.
90. We'll dismiss the possibility that Company A or some third entity could control Person D's entities. Person D is a passive investor with no relationship with Company A or its other directors outside Person D's duties as a director, and Person D spends most of his or her time and efforts in operating other businesses. Company A, Person B, or entities they control don't hold ownership interests in any of Person D's entities that would give them rights to income, capital, or votes. The ruling facts don't suggest Company A or Person B (or entities they control) have any influence over Person D, or that the entities Person D controls are controlled by Company A, Person B, or another entity or entities (other than Person D).
91. Therefore, we need to test whether Person D or Person D's related entities control Company A.
92. We explained in our reasons for Question 1 at paragraph 58 that Person D's control percentage was over 50% from Date Y to Date Z and at least 40% but less than 50% from Date Z.
93. Person D controlled Company A from Date Y to Date Z. Person D's control percentage was over 50%, which is more than 40%. This means Person D controls Company A under subsection 328-125(2). The Commissioner's discretion in subsection 328-125(6) is unavailable because Person D's control percentage is over 50%.
94. But Person D didn't control Company A from Date Z. Person D's control percentage from that time was at least 40% but less than 50%. We concluded in our explanation to Question 1 that the Commissioner will exercise the discretion in subsection 328-125(6) to treat Company A as not being controlled by Person D.
95. Our conclusions on the 'connected entity' issue follow. Person D (and Person D's entities) and Company A wereconnected entities from Date Y to Date Z as Person D controlled Company A (and Person D controlled both his entities and Company A). But Person D (and Person D's entities) weren'tconnected entities from Date Z onwards because Person D is taken not to have controlled Company A.
96. As with Question 1, our decision depends on the ruling facts and assumptions: see paragraphs 71 and 72.
Conclusion: Person D's entities count towards Company A's aggregated turnover from Date Y to Date Z, but not afterwards.
97. The annual turnovers from Person D's entities are included in Company A's aggregated turnover for the first of those periods but not the second. Person D's entities are connected with Company A for the period from Date Y to Date Z, so their annual turnovers are included in Company A's aggregated turnover for that period. However, Person D's entities are neither connected with Company A nor affiliates of Company A for the period from Date Z onwards. It follows that their annual turnovers don't count towards Company A's aggregated turnover from that point.
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[1] Appendix C, paragraph 5; Historical Share Register, attached to an email from PwC (Hugo Anderson) to ATO (Edward Brackin) received Tuesday 13 August 2024, received by the ATO at approximately 12:06pm (AEST).
[2] Taxation Determination TD 2023/5 Income tax: aggregated turnover and connected entities - Commissioner's discretion that an entity does not 'control' another entity.
[3] Subsection 328-125(1).
[4] Subsection 328-125(2).
[5] Subsection 328-125(6).
[6] Subsection 328-125(7).
[7] Explanatory Memorandum (House of Representatives) to the Tax Laws Amendment (Small Business) Bill 2007, at paragraphs 2.59 and 2.60.
[8] Explanatory Memorandum (House of Representatives) to the Tax Laws Amendment (Small Business) Bill 2007 at paragraph 2.36.
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